We use cookies to understand how you use our site and to improve your experience. This includes personalizing content and advertising. To learn more, click here. By continuing to use our site, you accept our use of cookies, revised Privacy Policy and Terms of Service.
You are being directed to ZacksTrade, a division of LBMZ Securities and licensed broker-dealer. ZacksTrade and Zacks.com are separate companies. The web link between the two companies is not a solicitation or offer to invest in a particular security or type of security. ZacksTrade does not endorse or adopt any particular investment strategy, any analyst opinion/rating/report or any approach to evaluating individual securities.
If you wish to go to ZacksTrade, click OK. If you do not, click Cancel.
3 Well-Positioned Stocks in the Oil & Gas Drilling Industry
Read MoreHide Full Article
The Zacks Oil and Gas - Drilling industry continues to look up despite some concerns. In particular, high activity levels and strong demand in larger, oilier basins are expected to drive the space higher going forward. Although macro challenges are leading to some moderation in activity, we think the industry still has fuel left in the tank, especially for the operators that target growth opportunities and operating efficiency initiatives. We advise investors to focus on Seadrill Limited (SDRL - Free Report) , Patterson-UTI Energy (PTEN - Free Report) and Precision Drilling Corporation (PDS - Free Report) .
Industry Overview
The Zacks Oil and Gas - Drilling industry consists of companies that provide rigs (or specialized vehicles) on a contractual basis to explore and develop oil and gas. These operators offer drilling rigs (both land-based/onshore and offshore), equipment, services and manpower to exploration and production companies worldwide. Drilling for hydrocarbons is costly and technically difficult, and its future primarily depends on contracting activity and the total number of available rigs at a given time rather than the price of oil or gas. Within the industry, it's interesting to note that the volatility associated with offshore drilling companies is much higher than their onshore counterparts and their share prices are more correlated to the price of oil. Overall, drilling stocks are among the most volatile in the entire equity market.
3 Trends Defining the Oil and Gas - Drilling Industry???s Future
Activity Outlook Remains Robust: Despite slowing a bit in recent times, activity has remained healthy in North America, a region on which most drillers are highly dependent. This means upstream operators (particularly in North America) are drilling more wells to increase output that has remained depressed over the past few years due to lack of investment, supply-chain issues, scarcity of labor and equipment attrition. With domestic oil and natural gas output set to go up, drilling companies stand to benefit.
Low Replenishment of Reserves Point to Drilling Requirement: One of the key positive arguments for drillers is the focus on the reserve replacement rate. Over the past few years, the supermajors have struggled to replace all of the oil and gas they churn out, raising concerns about future production. In this context, Chevron’s 10-year reserve replacement ratio of 100% indicates the inability to add proved reserves to the amount of oil and gas produced. This clearly calls for a calibrated approach in meeting reserve shortfalls in the long run. Consequently, a gradual improvement in drilling activity looks likely.
Dwindling Pool of Legacy, High-Margin Contracts: For most operators, order levels have remained depressed, and day rates are trending just above cash costs despite the strong rebound in commodity prices. This has put increasing pressure on their revenue-generating capacity. Further, as the companies’ legacy, high-margin contracts wind down slowly, the drillers are faced with the prospect of a drop in backlog (and consequently, revenues), which is likely to accelerate over the next few quarters. This also leaves the drillers vulnerable to addressing their massive debt maturities and investment in newbuilds.
Zacks Industry Rank Indicates Positive Outlook
The Zacks Oil and Gas - Drilling industry is a 9-stock group within the broader Zacks Oil - Energy sector. It currently carries a Zacks Industry Rank #116, which places it in the top 46% of 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates upbeat near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s position in the top 50% of the Zacks-ranked industries is a result of a conducive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are optimistic about this group’s earnings growth potential. While the industry’s earnings estimates for 2023 have improved 109.1% in the past year, the same for 2024 have risen 170.6% over the same timeframe.
Considering the encouraging dynamics of the industry, we will present a few stocks that you may want to consider for your portfolio. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.
Industry Outperforms Sector But Lags S&P 500
The Zacks Oil and Gas - Drilling industry has fared better than the broader Zacks Oil – Energy sector over the past year but has underperformed the Zacks S&P 500 composite over the same period.
The industry has gone down 10.2% over this period compared with the broader sector’s decline of 12.4%. Meanwhile, the S&P 500 has gained 2.2%.
One-Year Price Performance
Industry's Current Valuation
Since oil and gas drilling companies are debt-laden, it makes sense to value them based on the EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) ratio. This is because the valuation metric takes into account not just equity but also the level of debt. For capital-intensive companies, EV/EBITDA is a better valuation metric because it is not influenced by changing capital structures and ignores the effect of non-cash expenses.
On the basis of the trailing 12-month enterprise value-to-EBITDA (EV/EBITDA), the industry is currently trading at 15.62X, higher than the S&P 500’s 12.75X. It is also well above the sector’s trailing-12-month EV/EBITDA of 2.73X.
Over the past five years, the industry has traded as high as 24.76X, as low as 7.28X, with a median of 12.52X, as the chart below shows.
Trailing 12-Month Enterprise Value-to-EBITDA (EV/EBITDA) Ratio (Past Five Years)
3 Oil and Gas - Drilling Stocks to Watch For
Seadrill Limited: Seadrill is a market-leading international driller with strong exposure in key strategic basins like the U.S. Gulf of Mexico, Brazil and Angola. Following the Aquadrill LLC acquisition earlier this year, SDRL has improved its cash flow generation potential significantly. A robust balance sheet, enhanced liquidity and credit profile are other positives in the Seadill story. The company has transformed its capital structure through accretive transactions and continues to deliver operational excellence.
The Zacks Consensus Estimate for this offshore driller’s 2023 earnings has been revised 67.4% upward over the past 30 days. SDRL has a trailing four-quarter earnings surprise of roughly 50.9%, on average. Seadrill carries a Zacks Rank #1 (Strong Buy) and its shares have gone up 37.5% in a year.
Patterson-UTI Energy: Patterson-UTI Energy's business is set to benefit from its proprietary design and technologically advanced ‘Apex’ rigs that can move faster than conventional rigs, drill quicker, and are better suited to new-age drilling. Meanwhile, the company's acquisition of Pioneer Energy Services has boosted its scale and geographic presence. Apart from getting hold of 16 super-spec rigs, PTEN will profit from Pioneer’s well-organized operations in Colombia. The company’s financial profile looks solid too.
The 2023 Zacks Consensus Estimate for this Houston, TX-based company indicates 166.2% earnings per share growth over 2022. PTEN currently carries a Zacks Rank #3 (Hold). The stock has lost 46% in a year.
Price and Consensus: PTEN
Precision Drilling: This #3 Ranked company is Canada’s largest drilling rig contractor. A provider of rentals, wellsite accommodations/catering and snubbing services, Calgary-headquartered Precision Drilling has active operations in the United States, Mexico and Saudi Arabia. In particular, PDS’ market-leading Alpha digital technology portfolio provides it with a competitive edge. A tight rig market, together with strength in the company’s activity levels should result in higher dayrates and an improving contract book. Precision Drilling’s prudent cost management and technological leadership are its other growth drivers.
The 2023 Zacks Consensus Estimate for PDS indicates 633.3% earnings per share growth over 2022. The company beat the Zacks Consensus Estimate for earnings thrice in the trailing four quarters and missed in the other. Precision Drilling stock has lost 48.2% in a year.
Price and Consensus: PDS
See More Zacks Research for These Tickers
Normally $25 each - click below to receive one report FREE:
Image: Bigstock
3 Well-Positioned Stocks in the Oil & Gas Drilling Industry
The Zacks Oil and Gas - Drilling industry continues to look up despite some concerns. In particular, high activity levels and strong demand in larger, oilier basins are expected to drive the space higher going forward. Although macro challenges are leading to some moderation in activity, we think the industry still has fuel left in the tank, especially for the operators that target growth opportunities and operating efficiency initiatives. We advise investors to focus on Seadrill Limited (SDRL - Free Report) , Patterson-UTI Energy (PTEN - Free Report) and Precision Drilling Corporation (PDS - Free Report) .
Industry Overview
The Zacks Oil and Gas - Drilling industry consists of companies that provide rigs (or specialized vehicles) on a contractual basis to explore and develop oil and gas. These operators offer drilling rigs (both land-based/onshore and offshore), equipment, services and manpower to exploration and production companies worldwide. Drilling for hydrocarbons is costly and technically difficult, and its future primarily depends on contracting activity and the total number of available rigs at a given time rather than the price of oil or gas. Within the industry, it's interesting to note that the volatility associated with offshore drilling companies is much higher than their onshore counterparts and their share prices are more correlated to the price of oil. Overall, drilling stocks are among the most volatile in the entire equity market.
3 Trends Defining the Oil and Gas - Drilling Industry???s Future
Activity Outlook Remains Robust: Despite slowing a bit in recent times, activity has remained healthy in North America, a region on which most drillers are highly dependent. This means upstream operators (particularly in North America) are drilling more wells to increase output that has remained depressed over the past few years due to lack of investment, supply-chain issues, scarcity of labor and equipment attrition. With domestic oil and natural gas output set to go up, drilling companies stand to benefit.
Low Replenishment of Reserves Point to Drilling Requirement: One of the key positive arguments for drillers is the focus on the reserve replacement rate. Over the past few years, the supermajors have struggled to replace all of the oil and gas they churn out, raising concerns about future production. In this context, Chevron’s 10-year reserve replacement ratio of 100% indicates the inability to add proved reserves to the amount of oil and gas produced. This clearly calls for a calibrated approach in meeting reserve shortfalls in the long run. Consequently, a gradual improvement in drilling activity looks likely.
Dwindling Pool of Legacy, High-Margin Contracts: For most operators, order levels have remained depressed, and day rates are trending just above cash costs despite the strong rebound in commodity prices. This has put increasing pressure on their revenue-generating capacity. Further, as the companies’ legacy, high-margin contracts wind down slowly, the drillers are faced with the prospect of a drop in backlog (and consequently, revenues), which is likely to accelerate over the next few quarters. This also leaves the drillers vulnerable to addressing their massive debt maturities and investment in newbuilds.
Zacks Industry Rank Indicates Positive Outlook
The Zacks Oil and Gas - Drilling industry is a 9-stock group within the broader Zacks Oil - Energy sector. It currently carries a Zacks Industry Rank #116, which places it in the top 46% of 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates upbeat near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s position in the top 50% of the Zacks-ranked industries is a result of a conducive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are optimistic about this group’s earnings growth potential. While the industry’s earnings estimates for 2023 have improved 109.1% in the past year, the same for 2024 have risen 170.6% over the same timeframe.
Considering the encouraging dynamics of the industry, we will present a few stocks that you may want to consider for your portfolio. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.
Industry Outperforms Sector But Lags S&P 500
The Zacks Oil and Gas - Drilling industry has fared better than the broader Zacks Oil – Energy sector over the past year but has underperformed the Zacks S&P 500 composite over the same period.
The industry has gone down 10.2% over this period compared with the broader sector’s decline of 12.4%. Meanwhile, the S&P 500 has gained 2.2%.
One-Year Price Performance
Industry's Current Valuation
Since oil and gas drilling companies are debt-laden, it makes sense to value them based on the EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) ratio. This is because the valuation metric takes into account not just equity but also the level of debt. For capital-intensive companies, EV/EBITDA is a better valuation metric because it is not influenced by changing capital structures and ignores the effect of non-cash expenses.
On the basis of the trailing 12-month enterprise value-to-EBITDA (EV/EBITDA), the industry is currently trading at 15.62X, higher than the S&P 500’s 12.75X. It is also well above the sector’s trailing-12-month EV/EBITDA of 2.73X.
Over the past five years, the industry has traded as high as 24.76X, as low as 7.28X, with a median of 12.52X, as the chart below shows.
Trailing 12-Month Enterprise Value-to-EBITDA (EV/EBITDA) Ratio (Past Five Years)
3 Oil and Gas - Drilling Stocks to Watch For
Seadrill Limited: Seadrill is a market-leading international driller with strong exposure in key strategic basins like the U.S. Gulf of Mexico, Brazil and Angola. Following the Aquadrill LLC acquisition earlier this year, SDRL has improved its cash flow generation potential significantly. A robust balance sheet, enhanced liquidity and credit profile are other positives in the Seadill story. The company has transformed its capital structure through accretive transactions and continues to deliver operational excellence.
The Zacks Consensus Estimate for this offshore driller’s 2023 earnings has been revised 67.4% upward over the past 30 days. SDRL has a trailing four-quarter earnings surprise of roughly 50.9%, on average. Seadrill carries a Zacks Rank #1 (Strong Buy) and its shares have gone up 37.5% in a year.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: SDRL
Patterson-UTI Energy: Patterson-UTI Energy's business is set to benefit from its proprietary design and technologically advanced ‘Apex’ rigs that can move faster than conventional rigs, drill quicker, and are better suited to new-age drilling. Meanwhile, the company's acquisition of Pioneer Energy Services has boosted its scale and geographic presence. Apart from getting hold of 16 super-spec rigs, PTEN will profit from Pioneer’s well-organized operations in Colombia. The company’s financial profile looks solid too.
The 2023 Zacks Consensus Estimate for this Houston, TX-based company indicates 166.2% earnings per share growth over 2022. PTEN currently carries a Zacks Rank #3 (Hold). The stock has lost 46% in a year.
Price and Consensus: PTEN
Precision Drilling: This #3 Ranked company is Canada’s largest drilling rig contractor. A provider of rentals, wellsite accommodations/catering and snubbing services, Calgary-headquartered Precision Drilling has active operations in the United States, Mexico and Saudi Arabia. In particular, PDS’ market-leading Alpha digital technology portfolio provides it with a competitive edge. A tight rig market, together with strength in the company’s activity levels should result in higher dayrates and an improving contract book. Precision Drilling’s prudent cost management and technological leadership are its other growth drivers.
The 2023 Zacks Consensus Estimate for PDS indicates 633.3% earnings per share growth over 2022. The company beat the Zacks Consensus Estimate for earnings thrice in the trailing four quarters and missed in the other. Precision Drilling stock has lost 48.2% in a year.
Price and Consensus: PDS